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The mortgage crisis was a reslt of poor government policy. Now this up tick thing. I just hope the government can learn the right lessons, fix the problems, and remember what it did so we don't have to go through this again.

a conscienceless sociopath willing to destroy the economy and wipe out the life savings of all Americans (and many others around the globe) just to pocket a few dollars for himself. The lapse of the uptick rule has opened the door to such people.

Since when did Capitalism breed people of conscience? There is logic to what you say -those working the system can doubtless come together to try to squeeze out nasty interlopers. It won't work though. Capitalism is a busted flush.

Capitalism is a busted flush.

Heh. It's natural to think so when times are hard. But given some sensible reforms (like the return of the uptick rule) and the passage of time (so people can catch their breath and stop panicking), the markets will get back on their feet and capitalism will go on.

This is a bad downturn, but as J.P. Morgan famously observed when asked about the stock market: "It will fluctuate." Those who want a smooth ride are better off investing in CDs.

“Capitalism is a busted flush.”

“With communism man exploits man with capitalism it is the other way around”

From my point of view very few people in the world understand this statement. We are now reaping the rewards of laissez faire capitalism and a mega industrial military complex that Ike warned us about way back in 1961.

Maybe as the Buddha suggested one must find the middle path. I.e. balance balance balance.

The government will convince most it is only a recession. We tend to kill the messenger so be weary of anything the messenger states when they have a vested interest in the message.

Michael,

I think the problem is that people bought stocks and other financial assets in the hopes that they could sell them later for more money.

Eventually, the music stops playing and the last one to sell is left without a chair to sit in.

This isn't about "capitalism", it is about speculation on asset bubbles.

The dow hit my intermediate-term downside guesstimate target yesterday (of 7600) that I made back in the summer but I suspect the new few years will see the dow cut in half again.

The economy over the past 20 years, especially the last 10, was based on asset appreciation, debt leveraging, government borrowing, securitization, and financial mania. And now it is all coming crashing down, just like it did in 1929 (or in Japan in 1989). I wouldn't touch stocks with a 10' bargepole for an investment. I've been begging the people I know to sell stocks for the past year, a couple of them listened.

We had a nice bounce today. It's quite possible we will get a decent bounce back to Dow 9000-9500 or maybe even 10K. If so I strongly urge people who are still fully speculated in the market to dump your shares, because the economy is going to be in the crapper for the next decade and so will stocks.

My next intermediate term prediction / guess is DJIA 4500 within the next 3 years.

I should add that I didn't expect to see DJIA 7600 until mid 1999, so things are falling apart much more quickly than I had dreamed. Every large bank in the country is insolvent -- hence the TARP, forced capital injections, and $750 billion bailout (which is just beginning). Do you really want to have your money in speculative assets based on earnings models built on debt bubble economics as the bubble bursts?

My next intermediate term prediction / guess is DJIA 4500 within the next 3 years.

Predicting the stock market is impossible. Oh, maybe a person can get it right once in a while - but consistently? Even the top analysts can't do that.

A year from now, I predict the Dow will be at 12,000 ... or maybe 5,000 ... or lower or higher or somewhere in between.

It's funny that after following this blog for so long, my first post is not about what I originally came here interested in, the paranormal, etc., but about the stock market.

Can't run away from reality no matter how hard I try though.

I completely agree with the nationwide calls to reinstate the uptick rule. Watching the market closely day after day lends insight into activity that most normal players never realize. I literally sit here and watch the short sellers gleefully making money off the misfortune of others. While from a strictly detached profit-based point of view, it makes sense, I can't see how they can ignore the slightly less than catastrophic results that their actions will bring.

You know? Looking at the big picture? Long run?

While I admit, being an investor in many tanking companies myself, my opinion is a bit biased, I like to think that regardless of my personal circumstances, I would still never willingly contribute to the downfull of our nation's economy(okay, I might have a penchant for dramatics...pish posh). Mayhaps our market can pull itself together with time, but it would surely not hurt to limit the choices of activity for the short sellers.

-Ting

Oh, and by the way, nice to meet everyone. Hope that since I broke my comment hymen, I'll be a more regular contributor around here.

Michael,

In August when the credit market started tanking in earnest it was very clear that the stock market was standing at the edge of the abyss and the next leg was going to be down. It wasn't clear that it would unfold in September through November but it was clear that it would happen with the next 6-12 months.

People have been propagandized to believe that the stock market is the best investment over time, and that "buy and hold" is the ultimate wisdom. In 1929 "buy and hold" cost you 80% of your portfolio over the next several years, with recovery not coming for two entire decades.

In Japan "Buy and Hold" in 1989 again cost you 80% of your portfolio and it has still not recovered, two decades after.

Anyone want to guess when NASDAQ is going to hit 5000 again? Perhaps when I am 70 years old. Glad I didn't "buy and hold".

You need to look at secular trends. Baby boomers retiring and liquidating their portfolios. Socialism and bailoutism waning. A collossal global economic recession and possible depression. Personal and government debt levels not to mention unfunded social security / medicare mandates. Demographic ageing out of the workforce. All of this, and the housing bubble, is why I sold most of my equity holdings in 2007, and my remaining ones in May 2008 after being 100% in stocks for the previous six years.

There is no driver for sustained gains in stock prices over the next 20 years, and lots of drivers of a collapse. Why hold onto assets who are very likely to keep falling?

Now that doesn't mean that someone who is picking undervalued stocks with great earnings and prospects can't do well. But as far as buying the indices, I would strongly urge people to stay away (except for a trade).

I’m not sure that demonizing short sellers or the lapse of the uptick rule for the current market turmoil is particularly wise. Short sellers are an important component of efficient markets, in that they actively search for overvalued companies. Their activities allow the pricing of securities to reflect more accurate conditions. While I do agree that spreading false rumors in order to enhance one’s chances of successful speculation is corrupt, I don’t see this activity as restricted to shorts. Some who bet long also engage in false rumors, which will artificially inflate the value of a given security. It’s also true that straight shorting is tremendously risky, as losses are theoretically unlimited if the speculator is wrong. Dabbling in leverage of any kind can be tremendously profitable if someone is right, but can easily bankrupt someone if the trend goes the other way. The recent explosion in the price of Volkswagen stock was due to a whole bunch of shorts being, well, caught with their shorts down.

A recent piece in http://www.forbes.com/2008/09/30/short-selling-ban-oped-cx_mb_1001brenner.html>Forbes, responding to September’s SEC ban on shorting certain stocks, addressed the issues of shorts and the uptick rule much better that I can:

In the spirit of improving market liquidity, the uptick rule was lifted last July based on a pilot study of 1,000 stocks, commissioned by the SEC. Although short-selling volume could be large on certain days due to the response of market makers to the increased demand of buyers, open interest has, on average, been approximately 1% to 2% of shares outstanding. Even for financial stocks, this proportion has recently been typically around 3% to 4%. Prima facie, it is hard to see how this activity by itself would drive stocks to the brink of bankruptcy . . .

Of course, pessimistic speculators who deem a stock to be overvalued will take risk by selling it short, hoping to be rewarded with an appropriate return. By the same token, if their guess proves to be wrong, they will pay a heavy price since their losses would be potentially unlimited if the stock rallies, contrary to their expectation. Optimistic speculators would take the other side, ensuring a nice symmetry in the actions of speculators.

The collective action of all these participants provides the following benefits: Information about the company is disseminated faster than in a market with restrictions on short-selling, volatility is reduced, risk premiums are diminished and, most importantly, liquidity is enhanced, permitting a new buyer or seller to find someone to take the other side . . .

Even if the short-sales restrictions are rescinded, bringing back the uptick rule is another futile and costly exercise. Forcing sellers to sell only when prices tick up prevents the rapid dissemination of negative information. The futures or options contracts that are not subject to this rule will reflect that information. Existing owners of the stock, who are not bound by the uptick rule, will then sell the stock they own and substitute it with the derivative asset.

It’s painfully clear that the recent turmoil in the equity markets has devastated the savings and retirement accounts of tens of millions of Americans. Combined with the dramatic collapse of the housing market (which still hasn’t seen a bottom), the average net worth of a typical middle class family has been absolutely hammered. In this sort of environment, it’s only natural for calls for various solutions to become louder. Still, restoration of the uptick rule and other manipulative regulations on markets will only delay the inevitable unwinding of the ridiculous levels of debt that led to the massive bubbles that are now bursting. But make no mistake, the leverage will unwind.

As far as where to expect markets to go from here, I’m afraid that I agree with Matthew C. While MP is absolutely correct in stating that no one can accurately predict the markets in the short-term, there is http://www.nytimes.com/2008/10/29/business/economy/29leonhardt.html?pagewanted=1&_r=2&ref=business>historical data that suggests that we could see markets halved again before a broad recovery occurs. That doesn’t mean that there might not be a significant rallies on the way there, not does it mean that there are not certain individual stocks that will perform well over the next few years.

In all honesty, my concern at this point goes well beyond financial concerns. I’m concerned that this perfect financial storm has the potential to lead to tremendous social unrest. I hope I’m wrong.

In 1929 "buy and hold" cost you 80% of your portfolio over the next several years, with recovery not coming for two entire decades.

Actually, if you correct for the substantial deflation that took place during the Depression, and consider the relatively large dividends paid by many companies in that period, and look at the investment alternatives ... it turns out stocks were not such a bad place to be:

In the 1930s, the S&P 500 returned 0.0% while small company stocks notched a 1.4% gain. In the same period, long-term bonds rose 4.9%, T-bills were up 0.6% and inflation was -0.2%, signaling disinflation. The returns of stocks for the 1930s were positive when adjusted for inflation and the returns of small company stocks were superior to those possible in T-bills, our stand-in for money markets. Without a doubt, for that decade long-term bonds were the champ. However, for the next three decades long-term bonds dramatically underperformed all stocks and their total return even after the 1940s were done was about par with the S&P 500 and below small stocks. (source)

Clearly, stock returns were anemic during that period, but so were T-bill returns. Only long bonds did (fairly) well, and they fared badly in the next decades. It was the Depression, after all; good investments were hard to come by. Sticking with stocks would have paid off in the long term, even in those days.

Besides, I don't believe we're in for a depression now. My guess (which is worth every penny you pay for it) is that we will have a sharp recession, ending late next year. Traditionally, stocks recover about six months before the economy rebounds.

Every time there's a correction, people say, "Buy and hold is dead!" But it will only be dead when someone figures out how to time the market consistently, and I'm not convinced this can be done.

That said, people who are very nervous about their portfolios should probably take Matthew's advice and rebalance during the next rally. There's no point in losing sleep over your investments. If you are afraid of further drops, you might as well wait for a spike in the Dow (it will happen) and then cash out at least some of your holdings. This may not maximize your long-term returns, but it will ease your mind.

I can't resist linking to this op-ed piece by Warren Buffet, the world's most successful investor.

He's buying stocks. In his personal portfolio, he plans to be 100% in stocks soon.

So the question I have for those who advocate going all-cash is: Are you a wiser investor than Warren Buffett?

Maybe you are. I know I'm not.

Don't get me wrong, I see the role that short sellers play in our market. Wouldn't be fair to let the corporations be the only ones lying. I just feel that regulations that have sustained our market for decades shouldn't be thrown out in the midst of, what can most optimistically be referred to as, a recession. And really, the top-decision makers should have known mid last year where our economy was most likely headed.

Regulations that are removed so suddenly have sudden impacts. The deteriorating portfolios and worthless retirement funds will only contribute to the social upheaval that looms in our horizon. Isn't that what we are really worried about?

I don't have the knowledge that Matthew and both Michaels possess, nor have I bothered to really research market history in depth, being a frivolous player myself. I am referring to the situation from a strictly laymen perspective. Many followed the advice of financial experts during the significant housing boom, and we know where that boom ended up. With the collapse of Fannie and Freddie along with a slew of once-giant housing related corporations, the only thing left in their portfolios is dust.

With the much publicized government aid, common sense tells us that those afflicted should be able to cash out in the near future with at least something, yet that is sadly not the case. Finger pointing naturally ensues and we end up with an extremely volatile environment. To stem this downward spiral we have to begin somewhere.

Of course that's just one person's two cents.

I am referring to the situation from a strictly laymen perspective.

Believe me, so am I.

I have no training or expertise in financial matters, though I do benefit from the fact that my father is a financial planner. Besides what I've learned from him, I've picked up a few things from popular books by Jane Bryant Quinn, Andrew Tobias, and Charles Schwab, among others.

My basic assumptions are that 1) no one can reliably and consistently predict the stock market; 2) the best time to buy is when everyone is shouting "Sell!"; 3) if you hold on long enough and have patience, the US economy will not disappoint you.

Here's a nice little article from Fortune magazine making some of the same points. An excerpt:

"What I always try to tell every client I talk to," says value-oriented mutual fund manager Wally Weitz, whose Omaha-based Weitz Funds oversees some $3 billion, "is that if you're going to have a stock portfolio, if you can't stand either financially or emotionally to have it be down 50% at some point, you shouldn't be in the stock market." But if you can pass the Weitz test, being a buy-and-hold investor today makes as much sense as it ever did. The point of sticking to sound, fundamental strategies, after all, is to keep you from making big mistakes in moments of crisis. And abandoning the market now could turn out to be a very big mistake.

For me, that's it in a nutshell. I don't want to be buffaloed by panic into making an impulsive move I'll regret later. If I thought I could predict the market, it would be a different story. Some people seem to feel they have this ability. More power to them. I know I don't have it - my few attempts at picking individual stocks were dismal failures - so I plan to stick to my simple buy-and-hold strategy and see what happens.

Besides, you know, it's only money ...

:)

True. If only others didn't idolize it so. Although the new colors in the 20s complement my haircolor so.

On the bright side, if our method of patient holding ends up wrong, we can alternate shifts peddling for change.

Michael, you are confusing two things - short selling and deliberate misinformation to manipulate stock price. Misinformation is a crime and is just as likely to occur through someone spreading false rumors to drive a price UP as drive a price down. Obviously, a substantial law enforcement effort goes into tracking this sort of price manipulation. But the main point is that the motivation (and ultimately the difficulty) of manipulation is the same whether you wand the price to go up or down.

As for short selling itself, remember that every stock transaction involves two parties with contrasting opinions about the direction of a stock price. This is true regardless of whether someone is st rating a long strategy or a short position. In fact, closing a short position in a declining market means BUYING a stock that someone is (perhaps anxiously) wants to sell. The uptick rule would potentially keep the seller stuck in their position as the price declines. Uptick rules ignore the role short positions play in keeping declining markets liquid.

If you are looking for culprits in the market meltdown, how about the roll back of oversight across the board. Decreasing the reserve requirements for scores of businesses (directly responsible for the disappearance of the investment banking industry.) Blind faith that securitizing bad credit mortgages would spread risk and allow market forces to solve all difficulties. CEO compensation tied to stock price, setting the stage for short-sighted manipulation of stock prices to pad executive coffers. The fact that real wages have stagnated and that consumer spending the last decade was fueled by a faustian bargain based on credit. Take your pick.

And on a more technical note, the somewhat unique confluence of economic events resulted in asset classes and sectors to be highly correlated. In other words, EVERYTHING went down. Usually, during most bear markets, there is a bull somewhere in some sector. (During the tech stock melt down, more stocks actually went UP during the first two years of the bear than went down.) That didn't happen this time for a huge number of reasons.

Until the SEC re-instills the ‘uptick’ rule, guys like me…and there are LOTS of us…will continue to short stocks INTO THE GROUND. It doesn’t even matter what the fundamentals are. Everyone just jumps on board. C and GE today, JNJ and MRK tomorrow. There is no other way to make money in this market.

I couldn't help but wonder about this guy this morning, as "C" (Citigroup) soars upwards by over 63% as I type this. Anyone holding a short position in Citi this morning is getting crushed, while learning that there are plenty of ways to lose money in this market.

It's also instructive regarding at least one fundamental that shouldn't be ignored: whether the Fed and/or Treasury will step in with massive guarantees to prevent the collapse of certain companies.

I believe that large-scale, semi-coordinated short-attacks on financial stocks are a bad thing. But I think the uptick rule is overkill--it's too crude a tool. "Bad" short selling could be discouraged with more selective, nuanced regulations that wouldn't impact harmless short selling. Here are a few possibilities. (They could be combined with one another in various subtle ways.) The fact that market-makers (specialists) now handle trading in a computerized fashion makes it possible for these complicated rules to be applied automatically and accurately.

1. The uptick rule kicks in only after a stock has declined by some percentage that day and/or week.

2. The uptick rule kicks in only if the short interest in a stock is above a certain percentage, or if it has risen by more than a certain percentage in the past month.

3. The uptick rule kicks in more readily on financial stocks, because they are vulnerable to "runs on the bank" if massive short selling and rumor-mongering drives down their stock or bond price.

4. The uptick rule kicks in more easily on days the market has dropped substantially.

5. The uptick rule self-adjusts the uptick amount required, depending on considerations like those listed above. E.g., a stock might have to uptick only a penny in one situation, or a dime or a quarter in another. (In the situation where large upticks are required, they could accumulate over several smaller intermediate upticks.)

6. Small downticks (a penny or two, for instance) could count as "upticks" within the meaning of the act, in borderline situations. This would ensure that short selling would account for only moderate selling pressure.

7. Software would analyze short-selling volume to prevent short sellers from gaming the system by submitting a sequence of small transactions.

Etc.

Matthew C wrote: "I should add that I didn't expect to see DJIA 7600 until mid 1999 ...."

I assume 1999 is a typo for 2009.

Here's a link to a blog-post that argues that short sellers have been unjustly demonized recently:

link

Michael, what you've written sounds a bit as if you've confused short selling with manipulation. As other people have pointed out, people with either long positions or short can attempt to manipulate the price by talking a stock up, or talking it down.

I'd approve of reinstating the uptick rule, but not because there's something evil and unAmerican about shorting stocks. The reason I want to see it reinstated is simply to check volatility: fear is more powerful than greed, and stocks tend to fall faster than they tend to rise.

Another thing that's happened: the NYSE used to have rules that turned off or slowed down certain kinds of program trading when the market was moving too fast, in either direction. You'd see "Curbs in" notices if you were watching the financial channels. They removed these rules in 2007. Now the only checks on volatility they seem to have are circuit breakers that close the market temporarily if it drops more than 10%, 20%, or 30% in a single day -- and as wild as the declines have been, we haven't seen 10% in a day lately.

I'm short right now: I've borrowed stock and sold it. At some point, I'm going to buy it back to cover my position. If the trade goes against me, the stock will rally, hit my buy stop, and I'll end up buying it back for more than I borrowed it for, which will hurt. If it doesn't, I'll ride the stock down, probably tightening my stop on the way to protect my profits. Sooner or later it will rally a bit, hit my stop, and I'll end up automatically covering my position by buying the stock and returning the borrowed shares. When this happens, I'll probably be taking shares off the hands of someone who held on too long and now wants to cut his losses. He's probably gotten hurt, but he'd probably be hurting worse if there were fewer buyers to narrow the spread between asking price and offered price.

Or: I *am* going to be buying this stock; if the trade works the way I'm hoping it works, I'll be buying it, and therefore supporting it, at a low. I'm not seeing this as a bad thing.

1. "Never make predictions, especially about the future." --- Casey Stengel.

2. I'm shorting Himalayan Glacier stock -- see


this news item
.

Bill I.

The SEC should reinstate the uptick rule ASAP. The hedge fund companies and short sellers manipulate the market like gambling without any regulation. It's not fair for the innocent investors like us. The stock market has already collapsed and is down over 40%. It will cause more serious damages if The SEC does not do anything.

Here's a link to an article by an insider who believes that predatory short raiding exists and should be discouraged by prohibiting "pinning the bid."

http://seekingalpha.com/article/109205-a-remedy-for-short-selling-manipulation

Here's a link to an article discussing the pros and cons of a bill in congress to revive the uptick rule:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ag2QOVwVr_dU&refer=home

Thanks for the link, Roger. My guess at this point is that the uptick rule will be restored, and that it will have little, if any, positive effect.

There's another piece on MSN today that suggests that the shorts who are now focusing on Bank of America may find themselves on the http://articles.moneycentral.msn.com/Investing/StrategyLab/Rnd18/P1/SkepticalCapitalistJournal20081209.aspx>wrong side of the trade:

Using a little bit of imagination, one can think of the entire U.S. financial sector situation as a hypothetical encounter between a herd of sheep (financial sector players) and a pack of wolves (hedge funds, short sellers, permanent "doom and gloomers" like economics professor Nouriel Roubini, etc.). This encounter so far has followed the basic rules of nature: Wolves (short sellers) have very methodically taken out the weakest sheep in the group one at a time . . .

But this wolf pack has not only grown in size exponentially (everyone and their mother now believes shorting financials is the most "bulletproof" investment strategy out there), but has also increased its overall confidence to a point where most of its members are now predicting that every bank in the herd will eventually fail. This field of financial sector "bears" now looks way too crowded and too emotionally committed to their argument to rationally change their minds. This alone is a pretty bullish sign, as it will likely lead to a massive short covering rally at some point.

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